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Finance a la shmoop what are convertible bonds? okay there's a joke about the

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Inquisition in here somewhere or maybe something about Cossacks and 17th

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century Russia what do you think animated musical or maybe a King Henry [King Henry VIII appears]

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thing but yeah all that's different kind of conversion way more pedantically a

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company might be having a hard time selling or issuing its bonds to Wall [Man with company briefcase for head meets man with Wall Street briefcase for a head]

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Street in order for them to close the deal with their stock trading today at

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25 bucks a share they might say well these bonds are convertible into 20 [Man with company for a head discussing bonds]

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shares of our stock that is they would have a single thousand dollar unit of

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that bond and it would convert into 20 shares which would then value the shares

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at 50 bucks either thousand divided by 20 there's 50 it's an advanced calculus

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sorry if you didn't have it which would sort of be you know the over/under price

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at which bondholders would start to seriously look at converting their nice

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safe bonds into those risky pesky equities well why would a company offer

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convertible bonds instead of you know just vanilla bonds well if they were [Man discussing convertible bonds]

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stuck paying 6% interest on just bonds but really could only afford to pay 4%

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well they might get the interest rate discount by throwing in that equity

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kicker in the bonds having that convertibility feature yes they would

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suffer dilution at 50 bucks a share but that price is double and change where

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the stocks out here so the company is probably thinking that it wouldn't mind

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some dilution from these bonds being converted up there in stock price right [Arrow points to stock value mark on graph]

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and remember the bonds pay the 4% interest along the way until they are

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converted the moment those bonds are converted into equity well then the debt

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on the balance sheet of the company and its obligation to pay that 4% yearly [Company balance sheet and interest highlighted]

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interest goes mercifully away they print 20 more shares for each bond converted

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and yes those shares may pay a dividend but as far as the convertible bonds go

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they are thereafter converted and saved and remember Jesus Saves but Moses

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invests

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